Inventory financing

How it works

Inventory finance supports the purchase or carrying cost of eligible stock. It can be a standalone facility or part of an asset-based line. The lender typically discounts inventory value to account for liquidation risk and may exclude certain items.

Where it can fit

Match the facility to inventory turns, seasonality, and sell-through. A short production or sales cycle with reliable demand creates a different risk profile from speculative inventory accumulated for an uncertain launch.

Look closely at the trade-offs

Slow-moving, perishable, custom, or obsolete items may have little borrowing value. Include freight, storage, returns, and markdowns in the forecast. A warehouse full of goods is not a substitute for an achievable repayment plan.

Finance stock that can turn back into cash

Sort inventory by product, location, ownership and age before discussing an advance. A stock ledger that mixes finished goods, returns, work in progress and consigned items makes it difficult to see what is actually available as collateral. Ask how the lender treats each category. The useful number is eligible lending value under the proposed agreement, not retail selling price.

Source: OCC: Accounts Receivable and Inventory Financing

Worked example: markdowns affect both profit and availability

A fictional retailer’s stock report totals $180,000. Assume $30,000 of obsolete stock and $20,000 of goods consigned to another seller are excluded from an illustrative borrowing base, leaving $130,000. At an invented 40% advance rate, that supports $52,000 before reserves or facility caps. If $40,000 is already drawn against that pool, remaining room is $12,000.

Now suppose another $25,000 of goods becomes ineligible after a slow selling season. The base falls by $10,000 to $42,000, leaving only $2,000 of room. At the same time, management may need to mark down those goods to sell them. The accounting margin and financing capacity can deteriorate together. This scenario is a planning exercise, not a prediction of how a particular lender will value stock.

Use a stock plan and a repayment plan together

For each major purchase, map the supplier payment date, expected arrival, selling period and customer collection date. Include freight, duties, warehousing and returns in cash needs. A low supplier price is less attractive if the business must hold excess stock for months and pay financing charges throughout. Test what happens if only half the planned quantity sells on schedule.

Ask who checks inventory, how counts are reconciled and when appraisals or inspections are required. If goods move between warehouses or a third party holds them, clarify the information and agreements needed. Avoid pledging inventory twice without the lenders’ knowledge. The collateral description and existing security arrangements should match the actual business.

Use a short inventory action list alongside the financing forecast. Identify which goods will be reordered, promoted, returned to the supplier or written down, and assign a realistic cash date to each action. Do not describe all stock as equally saleable. In the fictional example, selling an old item at a discount may release cash but also crystallize a loss. The business should understand both effects before treating clearance revenue as available profit or borrowing capacity.

• Which categories, locations and ownership arrangements qualify?
• How are age, condition, seasonality and liquidation value considered?
• What reporting, inspections and associated fees are required?
• What happens to the borrowing base if sales are slower than forecast?

Your next-step checklist

• Inventory aging and turnover
• Purchase and landed cost
• Storage and insurance
• Concentration and obsolescence risk